REG - Income Exclusions Flashcards
What are income exclusions?
Income items which are not included in GI by specification of law.
Are income exclusions taxed?
They are exempt from income tax, but may be subject to other taxes (i.e., gift tax, etc.)
What are the common exclusions from GI?
1) Payments received for support of minor children
2) Property settlement from a divorce
3) Annuities and pensions (to extent are a return of capital)
4) Life insurance proceeds received on death (face amount of policy)
5) Certain employee benefits
6) Accident and health insurance benefits purchased by taxpayer
7) Damages for physical injury or sickness
8) Gifts, bequests, devises, or inheritances (“gifts” from employer generally not excluded)
9) The receipt of stock dividends or stock rights (certain requirements)
10) Certain interest income
11) Savings bonds for higher education
12) Scholarships and Fellowships
13) Political contributions received by candidate’s campaign fund (unless put to personal use)
14) Rental value of parsonage or cash rental allowance for a parsonage excluded by a minister.
15) Discharge of indebtedness can be excluded in certain cases
16) Lease improvements made by lessee is excluded by lessor unless they are made in lieu of lessee’s rent payment
17) Foreign earned income exclusion (subject to certain qualifications)
What is the formula for taxable portion of annuity?
Excluded portion = (Net Cost of Annuity / Expected total of annuity payments) X Payment received.
How is the value for expected total annuity payments determined in the annuity payment exclusion formula?
Multiplying the annual return by either
1) the number of years receivable if it is an annuity for a definite period, or
2) a life expectancy multiple (from IRS tables) if it is an annuity for life.
Once determined it remains constant until total cost is recovered. Any additional payments received are fully taxable.
How are accelerated death benefits from a life insurance policy taxed?
If for a terminally or chronically ill individual they are generally excluded from GI.
- if portion assigned or sold to viatical settlement provider, then proceeds received from provider are excluded.
- for chronically ill the exclusion is limited to amount paid for unreimbursed long-term care costs. Payments made per diem (up to $330/day in 2014) are excludable regardless of costs incurred.
Are proceeds from life insurance policy obtained for consideration from other than insurance company taxable?
All proceeds in excess of cost are taxable to the beneficiary. Annuity rules apply to installment payments.
Are company-owned life insurance proceeds included in GI?
Employer can exclude the net of amounts paid (premiums, et al) by the policyholder for the contract. Full amount can be excluded if specified notice and consent requirements are met:
- employee must be notified in writing of the intent + amount to insure
- employee must provide written consent
- employee must be informed in writing that employer is beneficiary.
Insured must also have been employee sometime during last 12 months before death, or when contract issued was a director or highly compensated employee.
If proceeds paid to member of insured’s family/designated beneficiary, or used to by equity in employer by the insured’s heir.
Are life insurance proceeds taxable?
Face amount of policy is excluded.
- if received in installments, amounts in excess of pro rata face amount are taxed as interest.
- dividends on unmatured policy are excluded to extent not in excess of cumulative premiums paid.
- all interest is taxable if proceeds are left with insurance company under agreement to pay only interest.
Are employee benefits taxable?
Certain benefits are excluded:
A) Group-term life insurance premiums paid by employer (up to $50K of coverage; no limit if beneficiary is employer or qualified charity)
B) Insurance premiums employer pays for accident/health plan
C) Accident/health benefits employer provides if for 1) permanent injury or loss of bodily function or 2) medical care of employee or family (employee cannot take itemized deduction; and exclusion may not apply to highly comp’d if under a discriminatory self-insured plan)
D) Medical Savings Account contributions (limited amounts) for qualified employees of small business (50 or less employees) and self-employed.
E) Meals or lodging for convenience of employer on premises (must be a non-compensatory reason for convenience; lodging must be condition of employment)
F) Employer provided educational assistance from qualified educational assistance program up to $5,250/year.
G) Dependent care assistance if made under a written, nondiscriminatory plan up to $5K/year ($2.5K for married filing separate return)
H) Qualified adoption expenses up to $13,400 (2014) per eligible child, but is ratably phased out for modified AGI between $201,010 and $241,010.
I) Employee fringe benefits (certain requirements apply)
J) Worker’s compensation is fully excluded if for occupational sickness or injury and is paid under a worker’s comp act or statute.
What amounts are excluded for Medical Savings Accounts?
Employer contributions to an employee’s MSA - (except if made through a cafeteria plan) and employee contributions are deductible for AGI).
- contributions are limited to 65% (75% for family coverage) of the annual health insurance deductible amount
- earnings of MSA are not subject to tax; distributions from MSA that are used to pay qualified medical expenses are excluded from GI.
What fringe benefits are excluded?
1) No additional-cost services (e.g., airline pass)
2) Employee discount (must be nondiscriminatory)
3) Working condition fringes (so long as amount would have been deductible as employee business expense if paid by employee)
4) De minimis fringes (small value, impracticable to account for such as coffee, copy machine)
5) Qualified transportation fringes
- up to $130/month for 2015 for transit passes
- up to $250/month for 2015 for employer-provided parking
6) Qualified moving expense reimbursement: any amount received so long as would be deductible by employee if paid by them.
Are punitive damages received for physical injury/illness excludable from income?
No, all damages received other than punitive damages are excludable. Emotional distress is not injury or illness.
When is the FMV of stock received from employer benefit includable in income?
If the distribution:
- is on preferred stock
- is payable at the election of the shareholder in stock or property
- results in the receipt of preferred stock by some and common stock by other common shareholders
- results in the receipt of property by some shareholders and an increase in proportionate interests of other shareholders in earnings or assets of the corporation
What interest income is excluded from GI include?
Interest on obligations of a state or a political subdivision (i.e., municipal bonds) used to finance traditional governmental operations (includes DC and US possessions like Guam/PR). Other state and local gov-issued obligations (private activity bonds) are fully taxable, except the following:
- Qualified bonds for benefit of schools, hospitals, other charities
- Bonds for certain exempt facilities (airports, docks, wharves, etc.)
- Qualified redevelopment bonds, small-issue bonds (= $1mil), student loan bonds
- Qualified mortgage and veterans’ mortgage bonds
What are private activity bonds?
A state or local government-issued obligation that is generally fully taxable. Obligation is private activity bond if:
(1) more than 10% of the bond proceeds are used in a private trade or business AND more than 10% of the principal or interest on the bonds is derived from, or secured by, money or property used in the trade or business, or
(2) the lesser of 5% or $5mil of the bond proceeds is used to make or finance loans to private persons or entities.
Is interest from US obligations included in income?
Yes
What amount of interest on Series EE US savings bonds (i.e., savings bonds for higher education) can be excluded from income?
All accrued interest so long as it is used to finance higher education of TP, spouse or dependents.
- Must be issued after 12/31/1989 to person at least 24 y/o at issue date
- If proceeds at redemption (principal plus interest) exceed expenses, then pro rata amount of interest is excluded.
Is higher education savings bond interest allowed for any income level?
No, if TP’s modified AGI exceeds a certain level then the exclusion is subject to phase-out.
What are the phase-out rules for higher education savings bond (Series EE) interest?
In 2015 the phase out range is:
Married filing jointly: $115,750-$145,750
Single or Head of Household: $77,200-$92,200
-if exceeds the phase-out range for the applicable filing status, then no exclusion allowed.
How is the reduction of the higher education savings bond interest exclusion calculated?
(Excess AGI / $15,000 or $30K for joint returns) X (otherwise excludable interest) = Reduction
How are interest forfeiture penalties treated?
An interest forfeiture penalty for making a premature withdrawal from a CD should be deducted from GI in arriving at AGI in the year in which the penalty is incurred.
How is the amortization of bond premium on a taxable bond treated?
If bond acquired after 1987, then premium amortization treated as an offset to the amount of interest income reported on the bond. Calculation of annual amortization determined by date bond issued: if after 9/27/1985 then calculate under constant yield to maturity method (otherwise amortization is made ratably over life of bond). Constant yield method the amortizable premium is computed on the basis of the TP’s yield to maturity, using the TP’s basis for the bond, and compounding at the close of each accrual period.
Can a TP deduct amounts received for scholarships or fellowships?
Yes. Must be a degree candidate and can only deduct amounts used for tuition and course-related fees, books, supplies, and equipment.
- amount received as grant or tuition reduction for payment for teaching, research, etc. (i.e., received for services) not excludable
- non-degree students cannot exclude any amount
- also includes scholarships with obligatory service requirements received by degree candidates at qualified organizations from the National Health Service Corps Scholarship Program and the F. Edward Hebert Armed Forces Health Professions Scholarship Program.
